Friday, October 17, 2008

CRISIL Analysis of Quality of FMP Portfolio

Fixed maturity plans (FMPs) constitute a quarter of the assets under management AUM) in the mutual fund industry. FMPs have also been the biggest contributor to the mutual fund industry’s growth so far in 2008. Recently there has been heightened apprehension about the quality of the FMPs’ investments and reports of investors seeking premature redemptions even by paying substantial exit loads. Against this background, CRISIL has carried out a quick analysis of the credit quality of FMP portfolios, even though it has outstanding credit quality ratings on less than 5 per cent of the 400 odd FMPs outstanding.

Says Roopa Kudva, Managing Director & Chief Executive Officer, CRISIL, “Portfolio data that is available with CRISIL for FMPs’ investments represents only 30 per cent of total AUM (50 per cent of the number of schemes) for this product. Here our analysis reveals that a high 85 per cent of these portfolios are invested in the highest safety AAA and P1+ rated instruments and government securities, which is indicative of strong credit quality. A full disclosure of investment portfolios of FMPs could, therefore enhance investor confidence in FMPs.”

CRISIL’s analysis further reveals that there are a number of FMPs whose portfolios are only invested in securities rated AAA and P1+. However, it is important to note that the sample size of this CRISIL study covered only 30 per cent of the AUM of all FMPs (50 per cent of the total number of schemes) because of the limited disclosure followed by a number of AMCs for this category of funds. While open ended funds in India typically follow a system of full portfolio disclosure on a monthly basis, this is not the case with FMPs. Says Krishnan Sitaraman, Head, CRISIL FundServices, “If the disclosure levels in FMPs were similar to those of open ended funds, investors would be fully aware of the credit ratings of the underlying investments. In this scenario, potentially redemptions could have been lower if the strong credit quality as seen above was maintained across FMPs. Monthly disclosure of portfolios in fact sheets could significantly increase transparency”

If the credit quality of FMPs’ investments is strong, then investors have much to gain by holding these investments to maturity. In this situation, it is actually premature redemptions which could lead to sub-optimal returns.
Fixed Maturity Plans (FMPs) have significantly gained in popularity in India as interest rates in India increased, and equity market returns diminished. With FMPs offering tax-adjusted returns that are higher than bank fixed deposits (FDs) of comparable maturity, AUMs under FMPs nearly quadrupled from levels two years ago. AUMs in FMPs at end September 2008 were about Rs.1.40 trillion1 (or
about US$ 28 billion). In 2008 thus far, over 800 schemes, aimed at both, the retail and institutional segments have mopped up Rs. 440 billion (or about US$10 billion) of investments.
Full portfolio disclosures with credit ratings of each investment or the credit quality rating of the FMP as a whole would help investors understand clearly which FMP portfolios have a higher risk profile. A higher risk profile could emanate either from taking exposure to instruments lower down in the ratings spectrum or through excessive exposures to sensitive sectors like real estate.

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